Cryptocurrency trade ban overturned

The Supreme Court,on Wednesday, passed a judgement lifting the curbs imposed by the Reserve Bank of India’s 2 year old ban on trading in virtual currency, cryptocurrency and bitcoins. The Court held that the RBI's circular, which prevented regulated entities from providing banking services to those engaged in the trading or facilitating the trading in VCs, was liable to be set aside on the "ground of proportionality". In order to arrive at this decision, the three judge bench comprising Justices R F Nariman, Aniruddha Bose and V Ramasubramanian.Examined in detail about how virtual currencies are treated by regulators in foreign jurisdictions and under foreign laws.

PETITION

It was claimed by the petitioners in the case that virtual currencies are not legal tender but tradable commodities/digital goods, not falling within the regulatory framework of the RBI Act, 1934 or the Banking Regulation Act, 1949. On the same premise, it was also argued that they do not fall within the definition of the expression "payment system" under Section 2(1)(i) of the Payment and Settlement Systems Act, 2007. Advocate Ashim Sood, appearing for IAMI, submitted that Reserve Bank of India lacked jurisdiction to forbid dealings in cryptocurrencies. The blanket ban was based on an erroneous understanding that it was impossible to regulate cryptocurrencies, Sood said.

Standing their ground, RBI said that while VCs are not recognised as legal tender,they can be used as a medium of exchange and hence a ban on them was justified so as to safeguard the payment system in the country. The court, at the outset, acknowledged that the exact identity of virtual currencies eludes precision. The Supreme Court rejected the argument that Virtual Currencies(VCs) were just goods/commodities which cannot be regarded as real money.

"When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate", the Court observed.

"The position as on date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned", the court observed.

The court took into consideration the following factors whilst striking down the ban:

1. RBI has not so far found, in the past 5 years or more, the activities of Virtual Currency exchanges to have actually impacted adversely, the way the entities regulated by RBI function.

2.  The consistent stand taken by RBI up to and including in their reply dated 04-09-2019 is that RBI has not prohibited Virtual Currencies in the country and

3. Even the Inter-Ministerial Committee constituted on 02-11-2017, which initially recommended a specific legal framework including the introduction of a new law namely, Crypto-token Regulation Bill 2018, was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures.

WHAT IS THE IDENTITY OF VIRTUAL CURRENCY?

• The major question that arised was – what is the identity of these virtual currencies? The bench examined the definitions used by various international bodies such as International Monetary Fund, Financial Action Task Force, European Central Bank etc.
• The apex court‘traditionally’defined 'money' in terms of the 3 functions or services that it provides namely (1) a medium of exchange (2) a unit of account (3) a store of valueand (4) final discharge of debt or standard of deferred payment. Though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and are capable of functioning as the functions.
• Senior Advocate, Nakul Dewan, argued that VCs do not qualify as money in – the legal sense (not having a legal tender status) or in the social sense (not being widely accepted by a huge population as a medium of exchange), therefore it cannot be treated as currencies within the meaning of any of the statutory enactments from which RBI draws its power. To this the court remarked, "we do not think that RBI's role and power can come into play only if something has actually acquired the status of a legal tender. We do not also think that for RBI to invoke its power, something should have all the four characteristics or functions of money."
• The court examined foreign judgments dealing with Virtual Currencies and came to a colcusion  - "It is clear from the above that the governments and money market regulators throughout the world have come to terms with the reality that virtual currencies are capable of being used as real money, but all of them have gone into the denial mode (like the proverbial cat closing its eyes and thinking that there is complete darkness) by claiming that VCs do not have the status of a legal tender, as they are not backed by a central authority".
• The Court added that though virtual currencies were not recognized as legal tender, they were capable of performing most functions of real currency."But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is as truer that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency."
• The Court further added that nothing prevented RBI from adopting a short circuit by notifying VCs under the category of "other similar instruments" indicated in the definition of "currency" in Section 2(h) of FEMA, 1999,"After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are just goods/commodities and can never be regarded as real money"

2018 BAN ON CRYPTOCURRENCY

Before being challenged by Internet and Mobile Association of India and few other stakeholders, the RBI had issued a circular in April 2018 banning regulated financial institutions from providing services to crypto businesses. The ban went into effect three months later and banks subsequently closed the accounts of crypto exchanges.

The circular issued on April 6, 2018 directed the entities regulated by RBI:

(i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and

(ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

It was also argued that cryptocurrencies were not "currency" in the strict sense, and that they could be termed as a medium of exchange or a store of value.